Frequent Deficiencies in Auditing Revenue Focus of PCAOB Alertby
Public Company Accounting Oversight Board (PCAOB) inspectors are finding “significant audit deficiencies” in the area of revenue, the US audit watchdog stated in a staff audit practice alert issued on Tuesday.
The PCAOB publishes staff audit practice alerts to highlight new, emerging, or otherwise noteworthy circumstances that may affect how auditors conduct audits under the existing requirements of board standards and relevant laws.
The alert, Staff Audit Practice Alert No. 12: Matters Related to Auditing Revenue in an Audit of Financial Statements, highlights for auditors the requirements for auditing revenue under PCAOB standards, after audit deficiencies in this area have been frequently spotted during PCAOB inspections.
“Revenue is one of the largest accounts in the financial statements and an important driver of a company’s operating results,” PCAOB Chairman James Doty said in a written statement. “Given the significant risks involved when auditing revenue, auditors should take note of the matters discussed in this practice alert in planning and performing audit procedures over revenue.”
The alert specifically discusses the following topics:
- Testing the recognition of revenue from contractual arrangements.
- Evaluating the presentation of revenue – gross versus net revenue.
- Testing whether revenue was recognized in the correct period.
- Evaluating whether the financial statements include the required disclosures regarding revenue.
- Responding to risks of material misstatement due to fraud associated with revenue.
- Testing and evaluating controls over revenue.
- Applying audit sampling procedures to test revenue.
- Performing substantive analytical procedures to test revenue.
- Testing revenue in companies with multiple locations.
“It is important for the engagement partner and senior engagement team members to focus on these areas throughout the audit and for engagement quality reviewers to keep these matters in mind when conducting their engagement quality reviews,” said Martin Baumann, PCAOB chief auditor and director of professional standards. “Audit firms should also revisit their audit methodologies and their implementation of those methodologies to assure that auditing standards are appropriately followed in the area of auditing revenue. In addition, they also should consider whether additional training of their auditing personnel or other steps are needed to assure that PCAOB standards are followed.”
The PCAOB also recommended that audit committees discuss with their auditors their approach to auditing revenue, including the matters addressed in the practice alert.
In May, the Financial Accounting Standards Board and the International Accounting Standards Board jointly adopted a converged accounting standard on revenue recognition. The PCAOB stated that the “matters discussed in this practice alert likely will continue to be relevant to auditing revenue under the new accounting standard.”
The PCAOB also noted that auditors should determine whether and how to respond to the circumstances discussed in the practice alert based on the specific facts presented. The statements contained in the practice alerts do not establish rules of the PCAOB and do not reflect any board determination or judgment about the conduct of any particular firm, auditor, or any other person.